Revised Double Taxation Avoidance and the Prevention of Fiscal Evasion (DTAA) Agreement signed today between India and Cyprus

A revised Agreement between India and Cyprus for the Avoidance of Double Taxation and the Prevention of Fiscal evasion (DTAA) with respect to taxes on income, along with its Protocol, was signed today in Nicosia, which will replace the existing DTAA that was signed by two countries on 13th June 1994. The Protocol was signed by Mr. Ravi Bangar, High Commissioner of India to Cyprus on behalf of India and Mr. Harris Georgiades, the Minister of Finance on behalf of Cyprus.

New DTAA provides for source based taxation of capital gains arising from alienation of shares, instead of residence based taxation provided under the existing DTAA. However, a grandfathering clause has been provided for investments made prior to 1st April, 2017, in respect of which capital gains would continue to be taxed in the country of which taxpayer is a resident.

The new Agreement provides for Assistance between the two countries for collection of taxes. The new Agreement also updates the provisions related to Exchange of Information to accepted international standards, which will enable exchange of banking information and allow the use of such information for purposes other than taxation with the prior approval of the Competent Authorities of the country providing the information. The new Agreement expands the scope of ‘permanent establishment’ and reduces the tax rate on royalty in the country from which payments are made to 10% from the existing rate of 15%, in line with the tax rate under Indian tax laws. It also updates the text of other provisions in accordance with the international standards and consistent policy of India in respect of tax treaties.

Provisions of new DTAA will enter into force after the completion of necessary internal procedures in both countries and is expected to come into effect in India in respect of income derived in fiscal years beginning on or after 1st April, 2017.

“The re-negotiation of the India-Cyprus treaty is a decisive and welcome move, which would facilitate the avowed object of bringing stability to the tax regime. Cyprus, also being part of EU, had been one of the key jurisdictions, apart from Mauritius and Singapore, for FDI into India until it got classified as an NJA by the Indian Government.

The agreement on exchange of information, including banking information, for purposes other than taxation and co-operation on collection of taxes will not only facilitate removal of Cyprus from the NJA list but also support the Government’s agenda of curbing black money, money laundering and tax avoidance.

Like the Mauritian development, the introduction of taxing rights on Capital gains in India under the Cyprus treaty may impact the foreign flows from this jurisdiction, at least in the near term, and may also prompt the existing investors to go back to the drawing board to reframe their current structures.”

“The renegotiated India-Cyprus tax treaty is part of an on-going effort by the present government to curb treaty abuse, tax evasion, and round-tripping of funds and is effective from 1st April 2017. Grandfathering of investments till 31st March 2017 is a welcome step and would give the investors a window for smooth transitioning of his investments. However the present press release is silent on the retrospective withdrawal of the NJA Notification issued earlier and therefore one needs to adhere to all the compliances till the official mechanism to initiate the relaxation is put in place.”